Its assessment is that the Riksbank will lift the repo rate in two steps to 4.0 pct during the autumn of 2007, roughly in line with market expectations and the Riksbank's own analysis.

"Thereafter, the repo rate will be jacked up in three more steps during 2008 to 4.75 percent, where the Riksbank will let it stay throughout 2009," it said.

Employment is rising, as are average hours worked because of decreasing absenteeism (including sickness absence and termination of the Career Break Initiative).

"As a result, the number of hours worked will be up by 3.0 pct this year - the strongest increase since the first measurements were taken in 1950," it said.

For the current year the unemployment rate (ILO definition) is expected to be 6.2 percent of the labour force, compared with 6.9 percent in the euro zone and 4.6

percent in the United States.

"The continued increase of employment in 2008 and 2009 will help to lower the unemployment rate to 5.8 pct in 2008 and 5.5 pct in 2009," KI said.

KI said general government finances remain solid in relation to established budget policy targets, with one of the principal reasons being that government transfer payments to households are not rising as fast as GDP.

It said expenditure as a share of GDP is the lowest since the mid-1970's.

In proportion to GDP, KI forecasts that the surplus in general government finances will be about 2.5 pct for 2006, 2007 and 2008.

"The reason why this surplus will not increase as the economy strengthens is that fiscal policy will be expansionary as a consequence of enacted and announced tax cuts that are not sufficiently financed," it said.